Question

Your subscription to Financial Times is about to expire. You plan to subscribe to the news paper for the rest of your life, and you can renew it by paying $60annually, beginning immediately, or you can get a lifetime subscription for $700, also payable immediately. If you can earn 4.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

a.15.18 b.12.00 c.16.03d.21.35e.14.22

Answer 1

We can state given situation in following formula
Present Value Of An Annuity Due
=C + C*[1-(1+i)^-(n-1)]/i]
Where,
C= Cash Flow per period =Annual payment = $70
i = interest rate per period =4%
n=number of period =need to be found
700= $60+60[ 1-(1+0.04)^-(n-1) /0.04]
700-60 =60[ 1-(1+0.04)^-(n-1) /0.04]
640 /60=[ 1-(1+0.04)^-(n-1) /0.04]
10.66667 =[ 1-(1.04)^-(n-1) /0.04]
n = 15.18
Correct Answer =a.15.18